Benefits

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At work, we had a division meeting with our vice chairman today. Basically, the company is in good shape. During the question and answer session, one individual asked, “If the company makes its goal of 12% ROE (return on equity) this year, what’s in it for us?”

The vice chairman stumbled for a moment, but then described a new stock purchase plan that will be going in effect during the first quarter of 2006. At that point, employees will be able to buy company stock, up to $25,000 worth each year, at a 15% discount off the lowest stock price in the thirty days leading up to the purchase.

It doesn’t sound like a bad deal. My only concerns are the fact that the company’s stock has been doing rather well lately. Perhaps it is overpriced and will head down. Secondly, I don’t want to be overweighted on company stock in which half of our 401(k) company match (so 2% of our salary) is required to stay invested.

It will be interesting to get the details of the new stock purchase plan. I’d like to see how long we are required to hold on to the stock before selling. The 15% discount sounds like a good bargain.

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It’s a fairly common option for US companies, and is typically referred to as ESPP (employee stock purchase plan). If the company meets certain IRS tests, it allows employees to purchase stock through payroll deduction at a 15% discount. Most programs chop the period into 6-month intervals, and you buy at 15% below market price on either the first day of the 6 month period, or the last day, whichever is lower. The better plans let you lock that price in for 2 years – meaning if your stock is going up, you’re buying at 15% below market price from 2 years back. You can do very well off this. There are typically no holding requirements, but there are special IRS rules on the gains you make – they are usually taxed as regular income instead of capital gains, unless you hold for 2 years. My advice.. invest in it all you can. It’s a guaranteed 15% return.

Flexo-fairly common benefit and a good one if the stock isn’t a dog. As you mentioned, one of the keys is the hold period-it’s usually very short but the second concern is how much comission you get charged when you sell.

Yes, it’s free money. Don’t hold on to the stock, just flip it and pocket the 15% gain.

Ramit

I disagree with PFBlog’s comments about flipping it. If it’s a bad stock, then sure–get rid of it.

But if you flip it in less than a year, you’ll pay income-tax rates (~ 35%, basically wiping out any gains). On the other hand, if you hold it at least a year, you’ll only pay 5 or 15% in taxes.

I’m a big fan of long-term investing, so I’d strongly recommend against selling it just because you’ll make a quick buck. If there’s still upside in the stock (and if it’s a good company, there is, even if it’s gone up a little now), you’ll be losing out on all those potential gains and incurring trading fees and taxes. Sure, I get your point about not wanting to be overweighted and not wanting to buy at the top; they’re all good points. But if you can, try to think long-term, like a 10+ year outlook. Counting all the fees associated with selling, is it a good place to keep your money for the long term?

About Luke Landes

Luke Landes founded Consumerism Commentary in 2003 and has been building online communities since 1990. Luke has contributed to PC World Magazine, US News, Forbes, and other publications. Read more about Luke and about Consumerism Commentary.

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